Telecom Decision CRTC 2002-34

Telecom Decision CRTC 2002-34 Ottawa, 30 May 2002 Regulatory framework for second price cap period Reference: 8678-C12-11/01 Table of content Paragraph Summary I Background The introduction of price cap regulation 1 The initial price cap regime 4 Review of the price cap regime 13 Scope of the present proceeding 17 The proceeding 28 II Overview of the next price regulation framework The form of regulation 38 The state of local competition 44 Balancing stakeholder interests 65 Quality of service 72 Earnings sharing 75 Objectives of the next price cap regime 83 Price cap period 100 III Competitor services Definition and Classification 109 Mark-up on Category I Competitor Services 197 Follow-up processes 247 IV Services, baskets and pricing constraints Introduction 255 General conclusions regarding the basket structure and 374 the application of a productivity offset Basket structure and pricing constraints: specific 390 conclusions Specific requests made by Aliant Telecom, MTS, SaskTel 459 and Bell Canada Paragraph Classification of services 483 Other issues 504 Implementation issues 569 V Components of the price cap formula Background 581 Inflation index 585 Productivity offset (X-factor) 591 Exogenous factor 647 Other matters 685 VI Quality of service The current regime 690 Positions of parties on the need for changes to the regime 695 The Commission's conclusions regarding the need 706 for change Classification of services for a quality of 709 service mechanism Form of quality of service mechanism 719 Rate adjustment plan for residential 731 and business customers Rate adjustment plan for competitors 749 VII Consumer service issues Consumer bill of rights 787 Billing policy issues 801 VIII Service improvement plans Background 807 Unserved premises 818 Underserved customers 870 Implementation 915 SIP cost recovery 928 Paragraph IX Contribution issues Background 940 The calculation of the TSR 943 The timing of the annual updates to the TSR 964 Monitoring and adjustment of the revenue-percent charge 970 X Reporting requirements Phase III/SRB and intercorporate transaction reports 979 Reliability and verification of Phase II costs 999 Other reporting requirements 1011 XI Procedural matters Opportunity to file further evidence declined 1020 Objections to evidence 1023 Appendix 1 - Competitor Services Appendix 2 - Classification of Services Appendix 3 - Retail Quality of Service Adjustment Plan Appendix 4 - Competitor Quality of Service Adjustment Plan Summary This summary provides highlights of the price regulation regime that will be applicable during the next four years to TELUS, SaskTel, MTS, Bell Canada and Aliant Telecom (the “ILECs”). The regime has been designed to meet the following objectives: · to render reliable and affordable services of high quality, accessible to both urban and rural area customers; · to balance the interests of the three main stakeholders in the telecommunications markets (i.e., customers, competitors and incumbent telephone companies); · to foster facilities-based competition in Canadian telecommunications markets; · to provide incumbents with incentives to increase efficiencies and to be more innovative; and · to adopt regulatory approaches that impose the minimum regulatory burden compatible with the achievement of the previous four objectives. To further these objectives, the Commission is adopting a price regulation regime that differs from the initial regime in a number of important ways. First, the next price regulation regime includes a greater number of baskets and service groups – eight in total – thereby permitting the Commission to more finely tune its pricing constraints to implement the objectives. In particular, the revised basket structure and focused pricing constraints ensure that the benefits of productivity gains are more evenly distributed across the various types of services and, hence, are enjoyed by a greater range of customers. They also indirectly help foster local competition by ensuring that the ILECs cannot reduce prices in a competitive market and recoup the lost revenues by raising prices in a market where competition is weak or absent. Second, the Commission is imposing a number of service-specific rate element constraints in order to provide customers with additional price protection where local competition is expected to develop slowly. Third, the Commission has refined the treatment of services in the Competitor Services group by establishing two categories of such services. The first category comprises services in the nature of an essential service. The pricing of these services has been revised and made subject to pricing constraints to ensure that competitors have access to the relevant services at rates which will foster the development of facilities-based competition. The second category comprises those services developed for use by competitors other than those in the nature of an essential service and are priced on a case-by-case basis. In addition, the Commission is requiring the ILECs to introduce a competitor Digital Network Access service and price it in the same way as services in the nature of an essential service. Fourth, the Commission is introducing quality of service mechanisms which provide for rebates to customers and competitors if the ILECs fail to meet the Commission mandated quality of service indicators. These new mechanisms are being introduced on an interim basis and will be finalized in follow-up proceedings. The Commission has also decided to initiate a proceeding in the near future to examine the establishment of a “consumer bill of rights”. Fifth, the Commission has approved the Service Improvement Plans of all of the ILECs, except SaskTel, subject to certain adjustments. These plans will extend service to unserved customers and upgrade service to underserved customers. Sixth, in keeping with the ongoing effort to streamline and improve the efficiency of regulation and in light of the structure of the next price regulation regime, the reporting requirements of the ILECs have been revised to eliminate the filing of Phase III/Split Rate Base reports, as well as intercorporate transaction reports. In addition, the Commission has decided to review the Phase II costing approach and develop an updated Phase II manual. Finally, with respect to contribution issues, the Commission has set the productivity offset for the national subsidy fund calculation at 3.5%. The Commission has also clarified certain aspects of the subsidy calculation. The Commission will conduct a review of the regime commencing in the fourth year of its term. The Basket Structure and Pricing Constraints The price regulation regime for the next four years includes eight baskets or groups of services: residential local services in high cost serving areas (HCSAs); residential local services in non-high cost serving areas (non-HCSAs); business services; other capped services; Competitor Services; services with frozen rates; public payphones; and uncapped services. Each of these baskets or service groups is subject to pricing constraints tailored to meet the circumstances of the relevant services. The individual basket constraints rely on an inflation factor, a productivity factor and an exogenous factor, as appropriate. The Commission has selected the chain weighted GDP-PI published by Statistics Canada as the inflation measure and it has set the productivity offset at 3.5%. In addition to basket constraints, a variety of rate element constraints are imposed on specific services in light of competitive circumstances and related considerations. These rate element constraints provide customers with additional price protection. The basket and service group structures and key pricing constraints are as follows: · A basket of residential local services has been created for non-HCSAs. This basket is divided into two sub-baskets: basic residential services and residential optional local services. The basket is subject to a constraint of inflation less a productivity offset given that little competition is anticipated in residential local services in most locations over the next four years. However, in order to avoid the possibility that the operation of the constraint might force price reductions which would have a negative impact on the development of local competition, this basket is subject to a deferral account mechanism. The disposition of the deferral account will be reviewed annually. · In order to provide additional pricing protection to customers, the sub-basket of basic residential services in non-HCSAs is subject to a constraint of inflation less a productivity offset, provided that productivity does not exceed inflation. If productivity does exceed inflation, the constraint will be set at zero. Services in this sub-basket are also subject to a rate element constraint which limits increases in any service rate element to 5% per year. The second sub-basket, which contains residential optional local services in non-HCSAs, is not subject to a basket constraint. However, some services in this sub-basket are subject to a constraint which limits price increases to $1 per feature per year. · A basket has been established for residential local services in HCSAs. This basket is subdivided into two sub-baskets: basic residential services and residential optional local services. No constraint is imposed on the basket. However, the sub-basket of basic residential services is subject to a constraint of inflation less a productivity offset, provided that productivity does not exceed

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